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ctalkeb said:

They went out in droves to watch Avatar though, based solely on the supposition that they were going to see the latest and greatest in technology.

Cinema now competing with numerous other entertainement forms, including games, does not indicate anything about audiences ability to percieve large differences.

As for the last bit, I'm not talking about 720p/1080p differences, but major advancements in physics and animation. Currently games look like someone playing with slightly advanced action figures in a world where nothing has any weight and all objects exist in seemingly separate realities.

Avatar has way more going for it than it's FX and you are frankly the first person in recent memory to suppose that is the reason why people went to go watch it let alone the sole reason.  Avatar was a great Christmas experience for the entire family and that is what lead so many people out to see it. Much like Toy Story 3 which more peole went out to see that year.  The graphics aren't even the draw in those cases. It's amazing experiences you can share with your whole family.  You have larger market potential when you do that instead of segregating the audience.   You are trying really hard to not see the forest for the trees.  

 Avatar's special effecgts were nice and they can afford to do what they please because they know Cameron returns on the investment he has a proven market history of doing so.  That is in no way a endorsement for any other compnay to spend that much on FX. That like Epic is a VERY special case.  That kind of approach for an industry at large is toxic.  It's why we see 3+ million in sales and the game isn't prifitable so studios get shut down in games. 

I have seen normal people with 20/20 eyesight to whom late PS2 madden games were were thought to be real life and they had to get pretty close to the already large screen to discern that it was a game.  They could not tell the difference almost a decade ago. Diminishing Returns.  In a theater my mother with good eyesight whom was 32 she kept asking me if I was sure they weren't real people when watching FF:TSW.  Diminishing returns. We hit good enough for the vast majority of the market a long time ago.  Nobody is going to even notice how real it is for all the money spent on in making it look more 'real' no matter the advancements it's just going to be a better simulated version of what you described above.